The PEG Ratio (Price/Earnings to Growth Ratio) is a crucial metric for stock valuation that relates the Price-to-Earnings (P/E) ratio to the expected earnings growth. This indicator helps investors assess a stock’s growth potential relative to its current valuation.

A low PEG Ratio may indicate an undervalued stock, while a high value might signal potential overvaluation. Use our PEG Ratio Calculator to quickly and easily determine the PEG Ratio for your stock analysis.

PEG Ratio Calculator

PEG Ratio Calculator

ⓘ Enter the current price of the stock in USD.
ⓘ Enter the Earnings Per Share (EPS) in USD.
ⓘ Enter the expected annual growth rate in percentage.

Formula for Calculating the PEG Ratio

The PEG Ratio (Price/Earnings to Growth Ratio) is a metric used to evaluate a stock’s valuation considering its growth potential. The formula for calculating the PEG Ratio is:

\(PEG \ Ratio = \frac{P/E \ Ratio}{Expected \ Annual \ Growth \ Rate \ in \ \%}\)

Where:

  • P/E Ratio: The Price-to-Earnings Ratio
  • Expected Annual Growth Rate: The projected annual growth rate of earnings per share
The P/E Ratio is calculated as follows:
\(P/E \ Ratio = \frac{Current \ Stock \ Price}{Earnings \ Per \ Share \ (EPS)}\)

Thus, the complete formula for the PEG Ratio is:
\(PEG \ Ratio = \frac{\frac{Current \ Stock \ Price}{Earnings \ Per \ Share \ (EPS)}}{Expected \ Annual \ Growth \ Rate \ in \ \%}\)

Interpreting the PEG Ratio:

  • PEG Ratio < 1: The stock may be undervalued
  • PEG Ratio = 1: The stock may be fairly valued
  • PEG Ratio > 1: The stock may be overvalued

It’s important to note that the PEG Ratio is just one of many metrics and should always be considered in the context of other factors.

Applying the PEG Ratio in Stock Valuation

The PEG Ratio is a valuable tool in stock valuation as it combines the Price-to-Earnings (P/E) ratio with expected earnings growth. However, investors should consider several aspects when applying it:

First, it’s crucial to view the PEG Ratio in the context of the industry and overall market, as typical values may vary by sector.

Second, one should scrutinize the quality of growth projections, as overly optimistic estimates can lead to a misleadingly low PEG Ratio.

Third, it’s advisable not to consider the PEG Ratio in isolation but in combination with other metrics such as book value, dividend yield, or free cash flow.

Finally, it’s recommended to track the PEG Ratio over an extended period to identify trends in company valuation. Through careful application of the PEG Ratio, investors can gain a more comprehensive picture of stock attractiveness and identify potential under- or overvaluations.

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